(This post appeared at the author’s blog.)
Here is Paul Krugman with a reasonably good explanation of what happens when countries ‘manage’ their currencies lower. It provides a boost to exports and an impediment to imports. It is not much different than restraints of trade like tariffs and subsidies.
Although I am glad that some of the economic sites and economists are willing to discuss this now, the question should be asked, “Where were they for the past 10 years?” Now that Krugman has made it respectable they are willing to speak, although some continue to uphold myths and blatant propaganda to support their favourite commercial interests, think tanks, ideology and honorariums.
The Chinese manipulation of the currency to the dollar was not subtle. China devalued the renminbi significantly in the latter part of the 1990’s, and then pegged it to the dollar. It then penetrated the usual safeguards of fair trade by obtaining ‘favourable’ rulings first from Bill Clinton and then from W. Bush that really ought not to have been granted until they allowed their currency to float on some prearranged conditions at the very least.
It suited some people to ignore it then because the arrangement provided cheap goods to the US while depressing the domestic manufacturing sector and working class incomes, while boosting the financial sector. It was a means of empowering Wall Street at the expense of the real economy.
Now China’s currency manipulation does not suit them, and they are willing to discuss it, since China is not ‘playing ball’ with the financial engineers and encouraging domestic consumption and adopting Western financial engineering as their masters as planned. There is also a realisation that their financial engineering has brought the world to the brink of a global crisis of insolvency and a tremendous blow to authentic capitalism.